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In Fiscal Year (FY) 2011, South Dakota collected $2.7 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average South Dakota taxpayers can afford this level of taxation.
As shown in the charts below, South Dakota’s state and local tax burden (tax collections divided by personal income) was the lowest in the nation for FY 2011 at 7.7 percent—or 26.3 percent below the national average of 10.5 percent. More impressively, South Dakota's tax burden has fallen a whopping 23.2 percent to 7.7 percent in FY 2011 from 10 percent in FY 1950 which is unrivaled by any other state.
South Dakota’s low state and local tax burden is driven by the fact that it does not have a state individual income tax or state corporate income tax. Additionally, relative to the national average, the property tax burden is 19 percent lower (2.8 percent vs. 3.5 percent) and all other taxes are 14.3 percent lower (1.7 percent vs. 2 percent). However, the sales tax is the 11th highest in the country which offsets lower taxes elsewhere (3.1 percent vs. 2.4 percent).
The sales tax burden is a concern even beyond its high burden. According to the Tax Foundation, South Dakota’s combined state and local sales tax rate (South Dakota allows for local option sales taxes) is only 5.83 percent—the 41st highest in the country. As such, the sales tax appears to be levied on a very broad-based number of goods and services which lead to a concern of tax pyramiding. Sales tax pyramiding creates all kinds of very bad economic distortions most often associated with a gross receipts tax (pdf).
Nevertheless, even a bad sales tax does not offset the economic benefits of having the country’s lowest tax burden. South Dakota taxpayers need to make sure their policymakers understand that point first and foremost.